Even after a year since market-regulator Sebi banned entry-load on mutual funds, fund houses are still grappling with how to reach the retail investors as distributors have completely stopped selling the product to them and the net flow of funds into equity schemes has completely dried up.
Data from Association of Mutual Funds of India show how retail investors are pulling out of mutual funds. In the last one year since the abolition of entry loads, the industry for the first time has seen a net outflow of Rs 11,560 crore from equity schemes. Even the number of new fund offers launched by asset management companies has seen a sharp decline and the collection so far this year has been just Rs 2,000 crore as compared to around Rs 15,000 crore in 2008 during the depth of the global economic crisis.
Until August last year, fund houses charged an upfront commission of 2.25% on the total amount invested and used this to pay commission to distributors for their services in selling mutual funds. Under the new norms, investors have to pay a mutually agreed commission to the distributor for the services he renders in selling the product. But given how we buy financial products, and mutual funds being more like a push product, distributors are finding it difficult to charge a fee for the advice as in the past, distributors used to repay a part of the commissions to the investor in cash.
Also, given the low level of financial literacy, moving to an advisory fee model will be premature as most financial products in India have been sold on a commission-based structure. Even the cost associated with customer acquisition and servicing in India are among the highest in the world, as anecdotal evidence suggests that out of every 4,000 calls a distributor makes, he is able to strike just two deals. So, in a country like ours where financial inclusion for all is a crucial national priority, some form of commission-based structure will incentivise agents to reach out to the yet untapped markets.
Smartly, most distributors are now aggressively selling Ulips, where the commission can be as high as 40% of the total premium in the first year itself. But even that will change from September 1, as the insurance regulator, Irda has extended the lock-in period of Ulips from three to five years and has mandated a 10-time increase in the minimum risk cover. Although, this will bode well for retail investors, as they will pay lower charges for the same premium they paid earlier, distributors will see their business crimp because of the low churn. Distributors? commission is estimated to come down to 5-10% in the first year. In fact, Ulips, which account over 40% of the total insurance policies sold in the country, are marketed very aggressively by distributors because of the high commission they get. More than Rs 2 lakh crore is mobilised annually as premium from Ulips and the tax exemption has been a major driver behind the success of the product.
As 4% of investments in mutual funds are through the direct route and the rest still rely on distributors, the onus will now fall on mutual fund companies to educate investors on the various schemes and build a sales force to reach out directly to potential investors in the fast-expanding middle-income group in Tier I and Tier II cities.
Most importantly, fund houses could work towards increasing the trail commission for equity funds to compensate distributors. At present, fund houses pay 0.25-0.75% as trail commission to distributors for equity schemes. The trail commission is paid to a distributor each year on the total accumulated corpus of the investor till the time investor does not redeem his investments. Increased trail commission will incentivise distributors to encourage investors to stay invested in a particular scheme for a longer period. Also, to make mutual funds more popular, fund houses will have to tap the networks of banks and post offices and focus on low margin products to attract risk-averse investors.
Both mutual funds and insurance companies will now have to look at the online route to tap investors for an efficient and cost-effective way to process large transaction volumes. Going forward, fund houses will have to look at various alternative models to reach out to retail investors, or else mutual funds will just be restricted to corporates alone.
saikat.neogi@expressindia.com